Introduction Sales taxes are imposed in the United States by state and local administrations, of which there are

more than 40,000. Merchants (shops and other sellers) charge the customer a combined rate which bundles together the state tax with the tax of the locality in which they sell. Depending on the locality, the merchant then either pays on the tax to the state administration, which unbundles it and remits the locality's share, or pays the state and the local administration their shares separately. A seller has to charge sales tax if it has 'nexus' where it is located. Nexus, or substantial physical presence, is established if a business maintains a temporary or permanent presence of people (employees, service people or independent sales/service agents) or property (inventory, offices, warehouses) in a given locality. There is no over-arching definition of nexus, so each taxing locality may define it differently - and many do, leading to endless problems for businesses which have operations in multiple states. Not all products are subject to sales tax, and states differ in the exemptions they offer. Food and clothing is commonly excluded, as are many pharmaceutical products; purchases for agricultural and sometimes manufacturing use are also frequently excluded. The rates of sales tax may also vary within a state for different types of business. All but five states impose a general sales tax at the state level (Alaska, Delaware, Montana, New Hampshire, and Oregon are the exceptions), but even in these five states some localities impose their own sales taxes, and some of the five impose sales taxes on particular products or services. Although from the buyer's perspective, a sales tax is a sales tax, in actuality there are varying legal bases for the tax: in some cases the tax amounts to a 'privilege' tax charged on the retailer's turnover, in other cases the tax is nominally imposed on the buyer, and there are hybrid situations as well. The legal basis of the tax can affect how it is described on invoices, bills or receipts, and can affect the calculation of the amount due, for instance in regard to discounts, although, needless to say, states differ in their treatment of discounts. A sales tax is a tax on the end-purchase of a good, or in other words a retail sale, so it normally does not apply if a sale is for re-sale or for subsequent processing. Most states define a retail sale very broadly, including for instance credit and instalment sales, trade-ins and exchanges. Normally sales tax is levied on 'tangible personal property'; it has to be movable, so that real estate is not included. Intangible property (eg stocks and bonds) are also excluded. In October 2007 Senators Lamar Alexander (R-TN) and Bob Corker (R-TN) joined Sen. Kay Bailey Hutchison (R-TX) in reintroducing a bill to make the state sales tax deduction permanent. ³This is a simple matter of tax fairness and common sense,´ explained Corker. ³Tennessee is fortunate not to have a state income tax, but Tennesseans should not be

penalized for this on their federal tax returns. Making the state sales tax deduction permanent keeps more money in the pockets of hard-working families and it¶s the right thing to do.´ Alexander and Corker said that losing this deduction ± which was set to expire at the end of that year if Congress does not act ± would cost Tennesseans more than $200 million. Tennesseans don¶t pay a state income tax on wages. In order to be treated fairly with other states whose residents are allowed to deduct their state income taxes from their federal income taxes, Alexander and Corker said Tennesseans should be able to deduct their sales tax payments. Nationwide, state, and local sales tax collections account for about a quarter of total state tax revenue, which is about the same as property taxes and income taxes. But the current provision allowing Americans to deduct state and local sales taxes from their federal income tax return is not permanent. Under the leadership of Senator Alexander and Senator Bill Frist (R-TN), Congress passed a tax relief bill in 2004 permitting the sales tax deduction for two years. Congress extended the deduction for another two years in 2005. Tennessee is not the only state that would be unfairly impacted by the expiration of the sales tax deduction. Seven states ± Alaska, Texas, Florida, Wyoming, Washington, South Dakota, and Nevada ± do not have a state income tax. Two states ± Tennessee and New Hampshire ± only impose an income tax on interest and dividends, but not wages. Historically, services have normally escaped sales taxation, but recently many states have begun to broaden the scope of their taxes to include some services, particularly if they are ancillary to or linked with tangible sales. Since a state does not have authority to tax outside its borders (other than when an outof-state business has nexus in the state) it is tempting for buyers to make their purchases from sellers in other states; and this is especially true when a state's sales tax applies to purchasers rather than to sellers. States have attempted to extend the reach of their sales taxes to cover out-of-state vendors, but the Supreme Court has consistently refused to allow this. For this reason, most states have 'use' taxes alongside their sales taxes, which typically apply to 'use, storage, or other consumption' within the state where the tangible personal property is located. Use taxes can be easily ignored by individuals, of course, and often are, with impunity, but businesses have more difficulty in ignoring them. Goods bought for out of state for re-sale would not be caught by a use tax, but a shop that bought fittings out of state would be liable.

As regards international transactions, the existing rules are clear about sales of physical products delivered in the United States: if the seller is in a country with which the United States has a double tax treaty (almost all high-tax countries) then there is no sales tax unless the company has a "permanent establishment" in the United States; for other countries (including almost all offshore jurisdictions) products are taxed on arrival if the sale is "effectively connected with the conduct of a US trade or business". The advent of the Internet has made something of a nonsense of the structure of sales and use taxes, since a seller in one state may distribute products to buyers in many other states, without tax being collected at any point. This subject is dealt with in the section on sales over the Internet, and the states attempted answer to the problem is described in the Streamlined Sales Tax Program section. From time to time, there is discussion over the introduction of a Value Added Tax (VAT). In October, 2009, t he Center for Freedom and Prosperity Foundation (CF&PF) warned that imposing a federal value-added tax (VAT) in the United States would lead to more spending, bigger government and a higher tax burden, following comments from senior Democrats and Obama administration advisors that such a tax would be desirable. Given the rising federal deficit, set to hit USD1.8 trillion this year, the hefty price tag of the imminent health care reforms and the fact that President Obama's tax reform panel is due to report its recommendations by the end of this year, it is perhaps not surprising that this debate is happening again; a similar debate about consumption taxes was had around the time President Bush created his own tax panel in 2004. However, this time, it seems that opinion is crystallizing in favor of the tax in the places of power rather than in lecture halls and committee rooms. However, according to the CF&PF, the evidence from Europe, where most countries impose VAT at rates averaging about 20%, the evidence that such taxes achieve their goals is far from convincing. State Wise Sales Tax In US:

Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware D.C. Florida

4% 0% 5.6% 6% 7.25% 2.9% 6% 0% 5.75% 6%

Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana

6% 4% 5% 6% 5% 6% 6.875% 7% 4.225% 0%

N Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island S Carolina S Dakota Tennessee

5% 5.5% 4.5% 0% 6% 7% 6% 4% 7%

Georgia Hawaii Idaho Illinois Indiana Iowa Kansas

4% 4% 6% 6.25% 7% 6% 5.3%

Nebraska Nevada N Hampshire New Jersey New Mexico New York N Carolina

5.5% 6.85% 0% 7% 5% 4% 4.5%

Texas Utah Vermont Virginia Washington W Virginia Wisconsin Wyoming

6.25% 4.7% 6% 4% 6.5% 6% 5% 4%

Further Clarification of Sales Tax:A sales tax is a tax on consumption, which is displayed as a percentage of the sale price. Sales taxes are assessed by every state except Alaska, Delaware, Montana, New Hampshire and Oregon. Hawaii has a similar tax although it is charged to businesses instead of consumers. In some cases, sales taxes are also assessed at the county or municipal level. The sales tax is the responsibility of the merchant to collect and remand to the state, and stated separately (or implicitly added at the time of sale) to consumers. Usually only consumers are charged the tax; resellers are exempt if they do not make use of the goods. In some jurisdictions, a reseller's certificate is required to make use of this privilege. This is in contrast to a value added tax (VAT), where resellers are also taxed (resellers may then claim the VAT paid on their purchases from the applicable authority). States which have exemptions for specific types of organizations (such as schools), may also require a certificate. A sales tax audit is the examination of a company¶s financial documents by the state¶s tax agency to verify if they have collected the correct amount of sales tax from their customers.

Types of Taxes:When we use the term "sales taxes" in a generic sense, we're referring to the taxes that states impose on retail sales. However, there are actually different types of sales taxes. In fact, in many states there are actually several distinct taxes that together comprise the state's sales taxes. For example, in Arizona, there are distinct sales taxes on such businesses as retailers, restaurant operators, contractors, and real estate rental companies. The three general types of sales taxes: 

Seller or vendor privilege taxes ² these taxes are imposed on retailers for the privilege of making retail sales in the state. Retailers usually have the option of  

absorbing the tax (that is, paying the tax out of their own pockets) or passing it along to their purchasers. Consumer excise taxes ² these taxes are imposed on the persons who make retail purchases in the state. In the states that impose this type of tax, sellers serve purely as agents who must collect the tax on the state's behalf. Because the tax is primarily the purchaser's responsibility, sellers don't have the option of absorbing the tax and usually must separately state the tax on the receipts or invoices they provide their purchasers. Retail transaction taxes ² these taxes are imposed on the retail sale transaction itself, with the primary liability for paying the tax falling upon both the sellers and the purchasers. Sellers are responsible for collecting and paying the tax, and purchasers are responsible for paying the tax that the sellers must collect and pay. In essence, this type of sales tax is a hybrid of the other two types. Operationally, however, it's closer to a consumer excise tax because sellers are not given the option to absorb the tax.

From a legal standpoint, knowing the type of sales tax you are dealing with is important because it determines who can be liable for the tax, who can sue on the tax, or who can make a claim for refund of the tax. The vast majority of states have a consumer sales tax, where the buyer bears the legal burden of the tax and the seller is required to collect and remit the tax to the state. Few states have the seller privilege tax option. Kentucky, for example, does, but its effectiveness as a marketing tool is limited because advertising the absorption of sales tax by a seller is illegal. From your perspective as a purchaser, knowing the type of sales tax with which you're dealing will help you properly handle sales taxes that are not billed. If you're dealing with a vendor privilege tax, you should never voluntarily pay a tax that hasn't been billed to you, because the tax is the seller's responsibility. In contrast, if you're dealing with a consumer excise or retail transaction tax, you shouldn't ignore any unbilled tax. Unless you have some written proof that you paid the tax, you can be held personally liable for the unpaid tax. If the unbilled tax wasn't caused by a seller's oversight that can be corrected with a new receipt or invoice,

Limitaion To The States:The Constitution of the United States limits the power of the states to subjects within their jurisdiction. Jurisdiction over interstate commerce is reserved to the federal government. Nevertheless, a resident of a state with a sales tax who purchases goods

from a place with no sales tax (or at a lower rate) might be subject to pay a "use tax" (often at the same rate as the state sales tax) for non-exempt purchases . Washington, D.C. policymakers have also looked at adding a national value added tax in combination with an income tax as a way to generate additional revenue. Impact of sales taxes Sales taxes are often implemented with the effect of being "regressive" on income (using a cross section time-frame), since low income families spend a greater share of their income on taxable consumption in a given year. Sales taxes can be applied to tangible goods like food (in some states), clothing, cars, furniture, household items, and other goods that make up the bulk of lower-income and middle-income family budgets. By comparison, the sales tax does not generally apply to landscaping services, attorney fees, private school tuition, stocks and bonds, real estate investments, and other purchases more typically made by higher-income families. The effect on the distribution of economic welfare differs with each state and their implementation of a tax. In addition, sales taxes do not apply to all goods, services, and investments made by various families, creating differing impacts on families at different income levels. Many states attempt to offset regressive effects by exempting necessity goods (like groceries) from the sales tax base. Some states have also worked to expand the sales tax to services, not traditionally taxed, in part as an effort to address fairness and the shift to a service economy. The sales tax also poses equity issues between those who can avoid the sales tax by buying on-line and those who shop locally. The Streamlined Sales Tax Project is an organized effort by states to standardize tax law among states and ultimately begin taxing Internet and mail-order sales in order to address this equity challenge. Other types of state tax systems can have similar distributions of tax incidence. The Tax Foundation states that corporate taxes accounted for 6.3 percent of low-income households¶ tax bills last year and estimate that American households pay $3,190 on average in corporate income taxes per year. Sales taxes are often seen as good tax systems for economic growth, savings, and investment. Economists at the Organisation for Economic Co-operation and Development studied the effects of various types of taxes on the economic growth of developed nations within the OECD and found that sales taxes are one of the least harmful taxes for growth.

State Wise Sales Tax Comparison:

State

+max Genera local l Surtax Tax

NonGrocerie Prepare Prescriptio Clothin prescriptio s d Food n Drug g n Drug

Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware Florida Georgia Hawaii Idaho Illinois Indiana

4% none 5.6% 6%

10% 7% 10.6% 6% 2%

8.75% 10.25% 2.9% 6% none 6% 4% 6% none 7.5% 8% 9% (max) > $50

6% 6.25% 7% 11.5% 9% 1%+ 9% (max) 1%+ 1%+

Iowa[122] Kansas Kentucky Louisiana Maine Maryland

6% 5.3% 6% 4% 5% 6%

7%

6%

5% 6%

7%

Massachusett 6.25% s Michigan 6%

6.25%

7%

> $175

6% 9.75%
(max)

6%

Minnesota

6.875%

7.5%

Mississippi Missouri Montana Nebraska Nevada New Hampshire

7%

9% 1.225%

4.225% 9.241% none 5.5% 6.85% 3% 7%

none

none

9%

New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Puerto Rico Rhode Island South Carolina South Dakota Tennessee Texas

7% none 4%

7% none 8.875% 9.25%
(max)

> $110

5.5%

8.25%

2%

5% 7% 4.5% none 6% 5.5% 7% 7.75% 5% none 8% 7% 7% 8% 4.5% 5% (max)

6%

4% 7% 6.25% 9.75% 8.25% 5.5%

Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming

4.75% 6% 4% 6.5% 6% 5% 4% 7% 5% 9.5% 6% 5.6% 7% 3% 2.5% 10% 5%+ 10% > $100

Color

Explanation

Exempt from general sales tax

Subject to general sales tax

7%

Taxed at a higher rate than the general rate

3%

Taxed at a lower rate than the general rate

3%+

Some locations tax more

3% (max) Some locations tax less

> $50

Taxed purchases over $50 (otherwise exempt)

No state-wide general sales tax

Sign up to vote on this title
UsefulNot useful